7/6/23 Investors have more to lose without gold in their portfolio - WGC

Investors have more to lose without gold in their portfolio - WGC

Neils Christensen  

Thursday July 06, 2023 13:34

(Kitco News) - The Federal Reserve's aggressive monetary policy stance to bring inflation down to their 2% target continues to take a toll on gold as prices struggle to hold above $1,900 an ounce.

However, the latest research from the World Gold Council said that investors should not give up on gold as its asymmetrical performance will continue to support prices in the second half of the year.

"[Gold] will capture some of the upside if things go well," said WGC head of research Juan Carlos Artigas in an interview with Kitco News. "But it will also protect you much better if things go bad."

In their half-year review, analysts at the World Gold Council said they expect gold to remain relatively stable at current prices through year-end. The neutral outlook comes as gold is currently trading around $1,915 an ounce.

Artigas said that right now, gold appears caught in a "wait-and-see" mode as investors try to determine what impact the Federal Reserve's aggressive monetary policies will have on the global economy. He added that currently, markets see the potential for a mild contraction by year-end and into 2024.

However, he emphasized that while recession fears have been pushed further out, they have not been completely priced out of the market. He said that this risk is why investors should continue to have an allocation to gold.

He added that it is still too early to tell what impact the Federal Reserve's monetary policies will have on the economy.

"Based on the price action we have seen in the first half of the year, gold has been quite robust. It's providing some support, and if there's a further deterioration in economic conditions, including unknown event risks, then there's more significant upside for gold," he said.

Despite its recent selloff below $1,950 an ounce, Artigas noted that gold has outperformed bonds and cash this year. He added that the only thing gold hasn't outperformed is developed economy equities.

The WGC noted that in the first half of the year, gold prices saw a gain of 5.4%; this comes as the S&P 500 has rallied 14% year-to-date. Artigas said that gold is doing exactly what it is supposed to do.

"Gold not only contributed positive returns to investor portfolios, it also helped dampen volatility throughout H1, especially during the mini-banking crisis in March," the WGC said in the report.

Although robust economic growth and solid labor market data will continue to weigh on gold, Artigas said that the WGC does see a limit to how low gold prices can go in the near term. He noted that a lot of the headwinds impacting the precious metal are starting to weaken, and said that even with markets pricing in more tightening this year, the Federal Reserve is close to ending its tightening cycle.

Artigas said that a peak in interest rates means that bond yields and the U.S. dollar won't go much higher.

"Most of the challenges for gold we have seen have been priced. We just don't see the conditions for a major selloff in gold," he said.

"It is worth noting, however, that given gold's positive performance in H1, an investor unwind would need to be severe to result in the average 2023 gold price falling below US$1,800/oz – its 2022 average," the WGC said in its report. "Given the inherent uncertainty in predicting the global macroeconomic outcome, we believe that gold's positive asymmetrical performance can be a valuable component to investors' asset allocation toolkit."